Protect Your Business from the Deteriorating US-China Relationship

The Deterioriting US-China Relationship

The US-China relationship has been deteriorating for years, but it continues to worsen with no end in sight. Doing business with Chinese companies is going to become increasingly difficult. Below we outline some of our concerns and some of the steps our international lawyer have seen businesses take to prepare themselves for an unsteady future.

What is happening with the US-China relationship?

Ever since former President Donald Trump imposed tariffs on Chinese imports in 2018, the relationship between the US and China has steadily deteriorated. If you’ve read our blog or the news, you’ve seen countless examples of this—the forced TikTok divestiture, EV tariffs, and congressional visits to Taiwan.

Many problems are systemic and predate or are unrelated to Trump’s tariffs, like control of foreign data, IP theft, China’s sinking demographics, and China’s flailing economy which of course is often blamed on the US.

Indeed, it seems like every week there are too many issues to keep up with. In just the last few days, we’ve seen the US ambassador to China blame the Chinese government for making exchanges between US and Chinese citizens impossible, reports of an investigation of a Chinese telecommunications company by the US Commerce Department regarding access to American data, reports of US and allies strategizing on imposing new restrictions on China’s semiconductor sector.

And to make matters worse, things look like they are getting much worse between China and its neighbors.

What will the future hold for China and its neighbors?

Earlier this week, a video surfaced of a Chinese coast guard vessel ramming into a Philippine vessel, with Chinese coast guard personnel holding knives and other weapons. This is the latest in the long saga of tensions in contested areas of the South China Sea. And of course, China has long had issues with Taiwan, India, and other neighboring countries.

These tensions are not likely to abate anytime soon. In fact, they will get much worse. Trump’s tariffs, left in place and even augmented by President Biden, have dealt serious damage to the Chinese economy, to the point where there are nearly 20 percent fewer Chinese imports to the United States.

Much of the imports China lost have gone to neighboring countries, like Vietnam, Thailand, and India. This is not going to help the relationship between China and its neighbors.

There’s a pretty good chance that the US would be drawn into any of these conflicts. Just a few weeks ago, a US admiral reportedly said he would want to turn the Taiwan Strait into an “unmanned hellscape” with “classified capabilities” if China invades. None of this bodes well for the US-China relationship. And damage to the US China relationship does not bode well for those doing business in or with China.

How can businesses protect themselves?

At a minimum, businesses must understand the US-China relationship if they want to minimize their risks when things get worse. But beyond that, there is actually a lot that businesses can do to protect themselves.

First, businesses can and should consider moving their manufacturing and other relationships out of China to other countries with more friendlier relationships with the United States. We’ve helped many businesses evaluate and secure relationships in countries like Vietnam, Thailand, India, Mexico, and elsewhere in Latin America. These markets (especially in Latin America which is much less likely to be drawn into a hot conflict between China and its neighbors) provide considerably more safety for businesses looking for long-term manufacturing relationships.

Second, businesses that choose to remain working with Chinese manufacturers must have a backup plan should things go bad quickly, or even slowly. That backup plan will often be point 1 above – finding a commercial relationship in some other friendly country. This is not always easy to do. We have plenty of client companies that need specialized machinery or even bespoke factories to make their product, and those are not things that can be easily shipped overseas or rebuilt. That is why point 1 is such an important thing to consider up front.

Third, companies that have other types of commercial relationships with Chinese companies – let’s say, a company that uses a Chinese distributor to sell its products into China or licenses some kind of IP to a Chinese company – is less likely to have a massive disruption in business should a hot war break out or there be some other kind of escalation. See Managing China Distribution: Best Practices for Protecting Your Interests.

But those companies should understand that they too face plenty of risk, including:

  • Arbitrary arrests of employees in China
  • Chinese government-imposed freezing of funds or assets bound for the US
  • Theft or misuse of company data

These are just a few examples, but they are things we have seen come up many times. A lot of these risks can be hedged against in a well-written contract, and companies that don’t take the time to get one will one day wish they had.

Conclusion

The US-China relationship is deteriorating, and a Trump win in November – something I didn’t even discuss above – could even more radically change the playing field. At minimum, Businesses doing business in or with must understand these risks. Diversification is key, but not always feasible. Businesses should also seek to mitigate their risks with strong contracts and by exploring insurance options.

Read More

China Business